United States Steel(NYSE: X) is an industrial icon in the United States, quite literally helping to build the country we know today. But the stock hasn't been a huge winner for investors for a number of reasons. Today, it is fielding takeover offers. Here's how much money you would have if you had invested $10,000 in U.S. Steel 10 years ago.
U.S. Steel: Not a lot of money
To get the headline number out right up front, a $10,000 investment in U.S. Steel a decade ago would be worth roughly $15,000 today. If you include reinvested dividends, that figure would have increased to nearly $16,300. Basically, this once iconic steel maker has been less than rewarding over the past 10 years. And that includes a 70% price advance over the past year, with a huge chunk of that coming in just the last couple of months thanks to a series of takeover offers.
To be fair, United States Steel is a cyclical company. That means that its performance tends to track the movement of the broader economy. Given the importance of steel in the production of things like roads, buildings, washing machines, and cars, to name just a few, that makes sense. Demand for such big-ticket items tends to decline during periods of economic weakness. So, in some ways, it is reasonable that shares of U.S. Steel wouldn't head continually up and to the right.
And yet, if you compare U.S. Steel to other large steel makers, the picture isn't very flattering. As the chart below shows, U.S. Steel was the worst performer of the group by a wide margin on a total return basis (the same is true for price alone).
X Total Return Price data by YCharts
Winnowing the comparison to newer steel industry bellwether Nucor(NYSE: NUE) allows for a finer comparison and one that highlights important industry changes that have taken place. To put a number on the that, a $10,000 investment in Nucor a decade ago would be worth roughly $30,700 today. Including dividends (Nucor is a Dividend King) would increase that to just under $40,000. This a very different -- and far more positive -- outcome.
U.S. Steel got left behind
So what did Nucor get right and U.S. Steel get so horribly wrong? One big difference here boils down to technology. When U.S. Steel was founded, the best way to make steel was with blast furnaces. These are large and expensive facilities to operate. When demand is strong, a blast furnace can produce huge profits, but when demand is weak, the high cost of running the plant generally leads to substantial losses.
Nucor was founded much later and uses electric arc mini-mills. This steelmaking technology may not be as profitable during high-demand scenarios, but the mills are smaller and a lot easier to ramp up and down along with demand. Thus they tend to remain profitable through the entire economic cycle. That more than offsets the less robust upside during short periods of industry excess.
This same dynamic is behind the even better stock returns offered by Steel Dynamics(NASDAQ: STLD), a company that was co-founded by an ex-Nucor employee and that also uses more modern steelmaking technology. In recent years, U.S. Steel has been adding electric arc mini-mills to its portfolio.
Because Nucor and Steel Dynamics weren't constantly swinging between gushing profits and red ink, they were able to invest in their steel operations fairly consistently over the years. That, in turn, resulted in business expansion over time, helping to turn each into a more profitable investment for shareholders.
X Debt to Equity Ratio data by YCharts
That said, there were other issues as well. For example, U.S. Steel had a much more leveraged balance sheet for many years. Debt can limit a company's ability to maneuver during hard times and it puts an upper limit on its options during good times. Also, Nucor and Steel Dynamics don't have unionized workforces, while U.S. Steel does. That has left U.S. Steel with material legacy costs, like pensions and retiree healthcare, that neither Nucor nor Steel Dynamics have to deal with. So a more modern fleet of steel mills was very important to the others' success, but it wasn't the only reason for its outperformance.
A final changing of the guard
Despite the fact that U.S. Steel isn't the company it once was, it still holds an important place in the industry. That said, given the takeover offers it is fielding today, it seems like the company's time might be up (though a buyer might choose to retain its iconic name). Still, for investors, that probably won't be the worst thing given that the steel industry had seemingly already left U.S. Steel behind years ago.
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Reuben Gregg Brewer has positions in Nucor. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
